Federal Reserve Governor Adriana Kugler stated that the current interest rate policy remains restrictive. She observed that the pace of returning inflation to the 2% target has diminished since last summer.
Kugler mentioned that goods inflation has increased recently, which may complicate efforts to control overall inflation. Current estimates indicate the 12-month PCE was at 2.5% as of February, according to CPI and PPI data.
Consumer Expectations And Inflation
Surveys suggest consumers anticipate further price rises, tied to uncertainties in trade policy. Early economic data for this year shows some signs of weakness, while the labour market remains stable with a low unemployment rate.
What Kugler is pointing out here is that borrowing costs are still high enough to slow down economic activity. That’s the intent, after all—to ensure inflation gets back to the 2% mark. The trouble is, progress on that front has begun to stall. Inflation had been steadily cooling, but lately, it’s not dropping as quickly as before.
A big part of the problem appears to be goods prices creeping up again. When goods inflation rises, especially after a period of relative stability, it throws off predictions and makes it harder for policymakers to determine if broader inflation is firmly under control. The latest data puts annual inflation—measured by the Fed’s preferred gauge—at 2.5% in February. That’s above target, and it’s based on earlier CPI and PPI reports that already hinted at persistent price pressures.
People seem to expect that prices will keep rising, possibly because of ongoing concerns over global trade policies. If consumers believe inflation will stick around, they may adjust their behaviour—spending more now to avoid higher costs later—which can, in turn, push prices up further. That dynamic can frustrate efforts to stabilise prices.
Labour Market And Economic Growth
Meanwhile, early indicators for this year’s growth suggest some loss of momentum. The economy isn’t collapsing, but certain data points are flashing weakness. That said, the labour market remains in good shape. Unemployment remains low, which suggests companies are still hiring and wage gains are holding up. For now, that supports spending and keeps the economy moving forward, but it also complicates inflation control since strong employment can support further price increases.
For traders in derivatives, what all of this tells us is that policy shifts are less certain than they seemed a few months ago. If inflation remains stuck above 2%, rate cuts may not come as soon or as aggressively as previously expected. But if weakness in growth starts spreading, then the calculus shifts again. Understanding how these pressures balance will be key in the weeks ahead.
